Ontario's statutory regime for secondary market liability came into effect in 2006 as a result of amendments to the Securities Act (Ontario) (the OSA), creating a statutory cause of action for deficient market disclosure. Part XXIII.1 of the OSA creates a statutory cause of action against reporting issuers, their officers and directors, and related parties for misrepresentations made in secondary market disclosures.
The case law for this secondary market liability is followed closely by both plaintiffs and defendants counsel, as each decision continues to mould this statutory regime. In Green v Canadian Imperial Bank of Commerce, the Court of Appeal clarified a number of issues and in so doing, appears to have hollowed out many of the protections that defendants have argued they were afforded in the statutory provisions.
Under Part XXIII.1 of the OSA, plaintiffs can bring a statutory cause of action for misrepresentations; however, such an action cannot be commenced without leave of the court and, pursuant to section 138.14, must be commenced within three years of the date of the alleged misrepresentation.
Before the Court of Appeal's recent decision in Green, the guiding case on the interpretation of the section was the Court of Appeal's decision in Sharma v Timminco.1
In Timminco, the plaintiff moved for an order declaring that the limitation period was suspended under section 28 of the Class Proceedings Act (CPA), which suspends limitation periods on the date a class proceeding is commenced. The issue before the Court was whether the cause of action under the OSA had been "asserted" for purposes of the CPA, suspending the limitation period even though the plaintiff had not yet been granted leave to commence such an action. The Court of Appeal clearly stated that leave must first be obtained from a court before the limitation period for the Part XXIII.1 cause of action can be suspended pursuant to the CPA.
It had been hoped that the Timminco decision would compel class action plaintiffs to bring leave motions on an expedited basis and would seem to strongly discourage the common practice of combining the leave motions with a motion for certification. However, this decision was followed by three other (conflicting) decisions on the issue (Green,2Silver v IMAX, and Trustees of the Millwright Regional Council of Ontario Pension Trust Fund v Celestica Inc.), as class action plaintiffs tried to circumvent expired limitation periods with varied success.
As a result of the above decisions, the state of the law on this issue was in clear conflict. In light of these discrepancies, the Court of Appeal convened a special and rare five-judge panel to hear the joint appeals of the decisions in CIBC, IMAX and Celestica Inc. In its recently released decision, the five judge panel reversed its decision in Timminco and concluded that the statutory limitation period was suspended under section 28 of the CPA. The Court held that articulating an intention to seek leave to commence a claim under the OSA (as well as pleading the facts that would support such a claim) was sufficient to suspend the limitation period even though the plaintiff had not yet been granted leave to commence such an action.
The Court of Appeal acknowledged that this decision reversed its decision in Timminco and provided class action plaintiffs with a procedural advantage that non-class action plaintiffs would not enjoy, but held that this interpretation was the only way to preserve one of the main benefits of a class action, the suspension of limitation periods for all class members. The Court of Appeal also relied on pending legislative reform, which it anticipated would have clarified the statutory limitation period, as evidence that this newest interpretation was to be preferred.
The most frequent issue arising in securities class actions is the threshold for leave. Prior to bringing an action under Part XXIII.1, the plaintiffs must obtain leave of the court pursuant to a two-part statutory test: (1) the action must be brought in good faith and (2) the plaintiffs must have a reasonable possibility of success at trial. The first part of the test is generally easily satisfied; the threshold for the second part of the test has been the subject of much debate.
The initial decisions in Ontario set a notably low standard for plaintiffs to obtain leave of the court. Decisions out of other Canadian provinces that have legislated similar causes of action to Part XXIII.1, suggested that a higher standard was appropriate. There had recently been an indication that perhaps these decisions were having an influence in Ontario when in Dugal v Manulife Financial,3 Justice Belobaba stated that for his part, he would interpret the provision to have a higher standard for leave, consistent with the test established in other provinces and moving away from the earlier Ontario cases setting a very low threshold.
In Green, the Court of Appeal established the standard to be applied and held that the test to be applied for leave was tantamount to the test to be applied under section 5(1)(a) of the CPA on a certification motion. The Court acknowledged that the evidentiary record was very different when applying the two tests (there is no evidence before the Court on a 5(1)(a) analysis), but still held that the tests should be the same and that both tests were merely designed to "weed out hopeless claims and only allow those to go forward that have some chance of success." This threshold is arguably even lower than the low threshold that had been established in the early leave decisions.
One of the articulated reasons for the Legislature instituting the statutory cause of action for secondary market misrepresentations was the purported inability of plaintiffs to successfully pursue a common law cause of action in negligent misrepresentation, largely as a result of the requirement to prove individual reliance. The issue of whether common law negligent misrepresentation claims are appropriate for certification on a class basis has invariably been an issue in these cases.
In Green, the Ontario Court of Appeal clarified the matter, and again, in a manner that generally favours plaintiffs. The Court held that, while individual reliance is not an appropriate issue for certification, there were common issues within the negligent misrepresentation claims that would significantly advance the litigation and ought to be certified. Moreover, the Court of Appeal stated that in certain circumstances (although not those presently in front of the court), inferred group reliance could be certified as a common issue.
The Supreme Court of Canada recently refused to grant leave to appeal in Timminco, which the Court of Appeal has now reversed, notwithstanding arguments that there was conflicting authority on the issues in that case. It is likely that the defendants in Green will similarly seek leave to appeal. Especially as Green deviates from prior authorities on three issues, the Court of Appeal in Green may not have the last word on the secondary market and negligent misrepresentation issues it decided. If, however, the law remains as stated in Green, then this may well shift the battleground in securities class actions away from leave/certification motions to trial where plaintiffs will have to prove their allegations.